Yoshida in China: Does China Mobile need iPhone?

China's telecom market is showing signs of distress. Wireless carriers in China are beginning to see their growing handset subsidies to customers eating into profits, while they struggle to increase their ARPU (average revenue per user).

China’s telecom market is showing signs of distress. Wireless carriers in China are beginning to see their growing handset subsidies to customers eating into profits, while they struggle to increase their ARPU (average revenue per user).

In parallel, the world is watching intently if China Mobile, the world’s largest wireless carrier based on number of subscribers, might soon start carrying Apple’s iPhones. Qualcomm is rumored to be unveiling a TD-SCDMA (China’s home-grown 3G standard) chipset later this year. The timing for the emergence of a TD-SCDMA-based iPhone, however, is controversial, since China Mobile is reportedly planning to go whole hog with the rollout of TD-LTE (4G) handsets in 2013.

A decline in the telecoms’ profits and earnings in China isn’t exactly what financial analysts were expecting in the first half of the year.

What factors are contributing to this disturbing trend?

First, price competition among China’s wireless operators – China Mobile, China Unicom and China Telecom -- has been heating up over the last six months. Moreover, handset subsidies have been pressuring all three carriers' ARPU.

Serving iPhones does incur costs for Chinese carriers. China Telecom Wednesday explicitly said in a statement that marketing expenses for the iPhone would weigh on profitability.

China Mobile at this point does not carry iPhones, because Apple does not make iPhones with TD-SCDMA, a standard mandated by China Mobile. Nonetheless, in order to compete with China Unicom and China Telecom, China Mobile said it would increase its handset subsidies in the second half of the year.

More specifically, China Mobile’s CFO Xue Taohai said it spent 12 billion yuan ($1.9 billion) on handset subsidies in the first half of the year, but that it would raise full-year subsidies to 26 billion yuan ($4.1 billion) from an initial plan for 21 billion yuan ($3.32 billion).

The goal everyone is gunning for is to attract as many higher-end customers as possible who will spend more money on services.

Battle for 3G subscribersSo, exactly, how many mobile users in China have already signed for 3G?

China Telecom Wednesday said it has 144.18 million mobile subscribers as of June, including 50.96 million 3G subscribers. That means 35 percent of its subscribers are already using 3G.

China Unicom says that a little over 25 percent of its subscribers have 3G contracts.

On the other hand, China Mobile which claims to have more than 680 million mobile phone users only has 10 percent of its subscribers using higher-revenue, 3G technology. In other words, most of China Mobile’s subscribers are using 2G, contributing to 4.3 percent slide in the company’s ARPU in the first half of the year to 67 yuan ($11).iPhone factorWill China Mobile find a way to persuade Apple to make TD-SCDMA-compatible iPhones? Some say yes, as Qualcomm is reportedly getting ready with TD-SCDMA chipset slated for launch later this year.

Or maybe not. A few observers say it may not be in the best interest of China Mobile, which plans to promote TD-LTE handsets in 2013.

Marvell Technology, a competitor to Qualcomm, is betting the farm on a TD-LTE modem for the Chinese market. In a recent interview with EE Times, Ivan Lee, vice president of mobile products at Marvell said that China Mobile recently announced the requirements for their TD-LTE. The world’s largest mobile operator’s specification says it needs to be able to operate on TD-SCDMA and GSM inside China. It requires the TD-LTE modem to offer roaming capability on 4G and FDD, not to mention 3G and WCDMA. During the interview, Lee said, “We’ll have a TD-LTE modem by the end of 2012, which meets all the requirements set forth by China Mobile.”

For the sake of bottom-line and profit margin, mobile operators in China could be better off the iPhone wagon! Galaxy is now a strong enough contenders. Hopefully, the WP8 smartphones from Nokia can be a strong player in the ring too. Plus, Lenovo Mobile is coming back. With Huawei / ZTE / Coolpad / Xiamei / Meizu coming up strongly, plus the home-court advantage, iPhone is sailing against a strong head wind in China.

iPhone is losing the halo. iPhone4s generally cost more to buy new than most smartphone like the Galaxy S3, but with inferior specification. High price, hence poor performance-to-price ratio makes it become un-attractive in the young generation. Samsung is getting strong in the China market, after so many years of cultivation. As a result, iPhone's no longer command the top price in the 2nd hand market. The next 12 months should be very exciting.

I was told that iPhone on China Telecom does not operates fully on its CDMA-based 3G network. In any case, iPhone is no longer seen as a smartphone with leading feature and capabilities. That is, iPhone has a poor capability-to-price ratio (often used by consumers to gauge buying decision) when compared to Galaxy S3 and others, Apple needs China Mobile more than the reverse.

Iphone is already widely in use for China Mobile, it's just not using 3G. Since unlike the US, initial phone cost is subsidized by expensive data plans, mobile vendor are offering iphones for China Mobile, even though there isn't an official China Mobile iphone.
That being said, I don't believe there will be a TD-CDMA version of iphone, TD-LTE maybe, but not this year.

The market force is bigger than vendor push. Given the size of China market, I am pretty sure Apple is very interested in getting a big chunk of it. Chinese might as well be very interested given the fact that a "2nd hand" iPhone sold for a fortune in China. Whether China Mobile is willing to sign up iPhone is another question. I believe China Mobile and Nokia have a tight partnership. Let see how thing will turn out.